Even as the exporting community is fighting a losing battle over taxation of DEPB (Duty Entitlement Passbook) benefits as the income tax field formations have begun to treat such income as 'Other Income' under the Income Tax Act, the Supreme Court has recently come out with a landmark judgement which is going to dishearten the large community of manufacturers as well as traders engaged in the business of exports.

The exporters claiming deduction on profits of self-manufactured goods by ignoring losses from export of trading goods are no more entitled to deduction under section 80HHC with the Apex Court dismissing final appeal of IPCA Laboratories against a Bombay high court judgement.

The judgement will hit the bottomlines of manufacturer-exporters many of whom are already saddled with such disputed liability as Income Tax department has already moved in action for recovery of tax liability in this financial year itself.

As per the law laid down by the Apex Court, a deduction can be permitted under section 80HHC(3) only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods.

The Supreme Court observed that section 80AB has been given an overriding effect over all other sections in chapter VIA. Section 80HHC does not provide that its provisions are to prevail over section 80AB or over any other provision of the Act. Section 80HHC would thus be governed by section 80AB. Decisions of the Bombay high court and the Kerala high court to the contrary cannot be said to be the correct law, the SC said.

Section 80AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration, said the SC.

The appellants are an export house. They hold a certificate issued by the Chief Controller of Imports and Exports. For the assessment year 1996-97 the appellants filed a return of income declaring nil income. It is an admitted position that the taxable income, before the deductions under Chapter VIA, was Rs 4.39 crore (Rs 43.9 million).

However, against this taxable income the appellants claimed various deductions. One such deduction was under section 80 HHC for Rs 3.78 crore (Rs 37.8 million). During the assessment proceedings it was found that the Appellants were exporting goods which were self-manufactured as well as goods manufactured by supporting manufacturers i.e. trading goods.

It was found that the sum of Rs 3.78 crore, which had been claimed as a deduction, was the profit from exports of self-manufactured goods. It was found that from the exports of trading goods there was a loss of Rs 6.86 crore (Rs 68.6 million). It was found that the appellants had issued certificates of disclaimer in favour of the supporting manufacturers in respect of the entire export of trading goods.

The assessing officer therefore held that there was a net loss from export of goods and disallowed the deduction of Rs. 3.78 crore. The Commissioner (Appeals) dismissed the appeal filed by the appellants on October 11, 1999. On December 29, 2000 the Income Tax Appellate Tribunal dismissed the second appeal. By the impugned judgement the Bombay high court also dismissed the appeal filed under section 260A of the Income Tax Act.

The Apex Court held that "undoubtedly section 80HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision the interpretation has to be as per the wordings of this section. If the wordings of the section are clear then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section. In this case we are concerned with the wordings of sub-section 3(c) of section 80HHC. As noted earlier sub-section 3(a) deals with the case where the export is only of self-manufactured goods."

"Sub-section 3(b) deals with the case where the export is only of trading goods. Thus when the Legislature wanted to take exports from self manufactured goods or trading goods separately, it has already so provided in sub-section (3)(a) and (3)(b). It would not be denied that the word 'profit' in Section 80HHC(1) and Sections 80HHC (3)(a) and 3(b) means a positive profit. In other words if there is a loss then no deduction would be available under Section 80HHC (1) or (3)(a) or (3)(b)."

"In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to a deduction. If the net figure is a loss then the assessee will not be entitled to a deduction. Sub-section 3(c) deals with cases where the export is of both self manufactured goods as well as trading goods. The opening part of sub-section 3(c) states 'profits derived from such export shall.' Then follows (i) and (ii). Between (i) and (ii) the word 'and' appears."

"A plain reading of sub-section (c) shows that 'profits from such exports' has to be profits of exports of self manufactured goods plus profits of exports of trading goods. The profit is to be calculated in the manner laid down in 3(c)(i) and (ii)."

"The opening words 'profit derived from such exports' together with the word 'and' clearly indicate that the profits have to be calculated by counting both the exports. It is clear from a reading of sub-section (1) of section 80HHC(3) that a deduction can be permitted only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. If there is a loss in either of the two then that loss has to be taken into account for the purposes of computing profits".

Section 80AB stipulates as follows:

"80AB. Where any deduction is required to be made or allowed under any section included in this chapter under the heading 'C-Deductions in respect of certain incomes' in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this chapter) shall alone be deemed to be the amount of income of that nature which is derived by the assessee and which is included in his gross total income."

Section 80B(5) provides that 'gross total income' means total income computed in accordance with the provisions of the Income Tax Act.

It was further held that 'even under section 80HHC (3)(c)(i) the profit is to be adjusted profit of business. The adjusted profit of the business means a profit as reduced by the profit derived from business of exports out of India of trading goods. Thus in calculating the profits, under Section 3(c) ( i), one necessarily has to reduce by profits under 3(c)(ii). As seen about the term profit' means positive profit.

Thus if there is loss then those losses in export of trading goods have to be adjusted. They cannot be ignored. We, therefore, hold that a plain reading of section 80HHC makes it clear that in arriving at profits earned from export of both self manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration.

If after such adjustments there is a positive profit the assessee would be entitled to deduction under section 80HHC(i). If there is a loss he will not be entitled to any deduction".

See full text of the judgement in 2004-Taxindiaonline-26-SC-IT in Legal Corner

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